1 1 1 . Minimal = 4,750,000) + 5 (40,000) +5 (0 i = Rs. 30,000 <2 The maximum profit is for Full and Partial product ine. ss 5 The Company should go for ful or patil prot line under Laplace citer, (is) The conditional opportunity loss table is ~ Amicipated Ist year Profit (Rs. 000's) Prodvet Acceptance Full Mintmal Good 0 30 Fai 0 10 Poor 3! 0 Maximum loss 2s » The minimug of maximum loss is for partial product line, ; <*. The company should go for partial product line under minimax regret enteria. (d) Decision-making under-Conflict (Theory of Games) The theory of games which is also called decision-making under conflict, dais back to 1944, the classic work of J. von Neumann and O. Morgenstern entitled Theory of Garies and Ee "t® Behavicur. Game theory provides a framework for analysing competitive situations fn whieh competitors (or players) make use of logical processes and techniques ip order to determine an opi : strategy for “winning”. Since many situations in business involve competition, game thay considerable theoretical intrest. > Coe _«, A game can be played between two or more individuals or groups of individuals, Business environment being always competitive, the number of problems which lend themselves to this are abundant. For example, two firms may be trying to determine how muck of advertising o do, wher the options in terms of amounts of advertising, and the payofls (may bein terms of increase in sep market share} are known, . 7 A Game is described by its set of rules. These rules specify ciearly what cack person, ccd player, is allowed or required to do under all possible sets of circumstances. The rules also define the amount of information, if any, each person receives. A gameris finite when each player has fine number of moves and finite number of choices at each move, _ 5 hear Kinds of Games. Itis convenient to classify garies eccarding to the number of players, fe, as two persons, three pérsons, etc. It is also convenient to distinguish betweew games whose payul afe zy , sum and those vihose are not. If the players make payments only to each other, ie., the Inss of one is the gain of the other, the game is said to be zero sum, Thus, solitaire is a one-person game and chess is atwe- person game. Mathematically speaking, a zero sum game can be represented ds: In aan person game with players Pl,, Pla..., Pl, and payoffs PF, (i = 1, 2,..n) bemadeto Pl, at the end of the game (PF, will be negative if PL, has to pay rather than receive). : Then, if ZPEi = 0, the game is zero-sum. #0, the game is non-zero-sum, ‘The usual distinction in game theory is betivech two-person games and games involving three or more pérsons. The'theory of games of three or mote persons (n-person games) is largely undeveloped, and it is precisely this limitation that lias restricted the application of game theory from many rea ie applications, Therefore, the discussigh of this chapter will be limited to the presentation and analysisof Swo-gerson zero-sum games, ‘The underlying assumptions, the rules of the game are given as follows: ~\ Statistical Decision Thoory 663 1. The F's, €F5 act rationally ang intelligenuy, . 2, Each player has available to him a finite set of peas courses 4, The players attempt tormmaximize Bains and i wes ae fe AAt reJevant information is known to cach player, : 5. The players make individuat decisions without direct communication. ayers simul i i 6. The pliers sivataneousy select tir respective courses of scion i | person Zero-Sum Game | Two-person zero-sum games are the Games played by two persons, parti ith directl sae interest. One persons’s ain, ae i parties, or groups, with directly et? hae orks pi ail aa the garme is exactly equal to another person's loss, and therefore, | am Cquals zero. Each person has altemative choices of strategies ‘| ioves) available : lh and the rules governing choices are known in advance tothe players. The | ome of a set of possible choices of strategies is also known to the two players in advance and is \ xessed int terms ef qumerical values, ie ‘A.two-person 7ero-sum game is conveniently matrix is often referred t9 as a payoff ma Tepresented by a game matrix as shown below. A m e trix, because the outcome of the altemative choice of egies are expressed in terme of payoff units, . | | Player 2's strategies i : | B, ts 4 Player A's ‘ . Strategies a - , An p ‘The above payoff matrix is in relation to player A. It is important to note that only. player A's gains included in the paydif matrix. However, ifthe payoff matrix represents gain: by player 4, then player intum loses the same amount gained by player A and the sum of the reward is zero (zero-sum). game with a Pure Strategy - Let us vonsider a game with a payoff matrix presented in the following table. This is a two person sum game with two altemative choices of strategies available to player’ A and three alternative ices of strategies available to player B. If the gayofls mutrix represents the per cent macket share ined by player 4, then player B lases the market share that A gains. : _ Player B Boe OB, B, . 4 80 o, 7% Pl ea 10 35 30 For example, if player A selects strategy A |, and player A selects strategy 2,, then player A wins 80 ent of the market share while player B loses 80 per cent of the market share.664 Business Statistics . ar y which enables him to pai, te objective is to select n straleg) In this game, player A's objective is to sel ot eae vvhich euables ita muy sible. In contrast, player B's objective t» to se lect nab! to lone ait possit is chosen by players A and B, then it is referred to as py ve | possible, Ifa single stag single strategy in a stable solution. Ifthe solytion is not eshje ‘Therefore, a pure strategy is : if ol abe, cannot have r pure strategy without further analysis. The first step in the pure strategies ig 1, ats the minimax and maximin value. I tr e the players to adopt. This equal value will be terme ‘eg the game. . > : iran IMlustraton 4, Consider the two-person 7ex0-5U™ game with he following payot matrix: er avalves coincide (equal), 'e get the pure strategy the two termed as saddle point and this Valve wil ten . * the ae Player B Player A 4, “2 ; 4 4 3 0 i oth the players and find the value ofthe gant. | Determine the optimal pure strategies f0r Solution, Using maximin principle, player fh i de,best ofthe worst uranic gins. Sirntaly, player 8 elct ai st which i ininimum of the maximum rye | jie the best ofthe worst losses. In fact, ifthe payotTs matrix contains both gains and losses for cach player, ithe, (rey | eld the same result Minimax ad raciin, both let he est ofthe wor outcomes. i Tieton wa Using the mavimum principle, the strategy tobe chosen will be determined based on the values of row minima $i, foc mininiax principe (for opponent willbe determined hhased on the values of the column maxima. This is, shorn anit) Row "rscec that strategy which is maximum of the minimum pay Player 4 Columa maximam 5 Indus game, layer A will choose strategy A, which yields the minimum pay ofT 4. Similarly the best rae fp bis astegy whch lend to anim column maxima. In hi ase, player B will choose strategy B whic basa saree fore of 4 Both the maximum value of sow minima and the minimum value of coluron maxima are denotol by askin be same matrix Since thevalue of the maximin coincides with he value ofthe minimax, an equilibrivm or saddle points deterwied) Fath pame. [te apparnt hata sade points that point which is minimum nthe row and maximum in theca The ame af pyotat an cqiirum pois aso known asthe value o he game, Hence, the opimal pre nec fb be nes sre: Payer A russlc strategy A and player B must acest strategy B. The value ofthe game is 4 which indica tt pet ‘Awl gain 4 wits and player B will lose 4 units. - } AGame with a Mixed Strategy es i : i ‘ 1 With no pure strategy solution, both players will prefer to alter the strategy selection or play @ nixed strategy. Consider the payoff matrix as below : : / Player A Since this game has no saddle point, therfore, we cannot have pire strategies. In such cases, oh player woul lite to mix up his strategies in a random selection. The random selection plan iavtrtStatistical Decision Theory 665 selecting ay une “Certain per Lent of the time, such that the Player's expected gains (a7 losses) ue equal, a less of the pponent's seiection of strategies. Selection of a stratcey, a given percent of the time is analogous to the selection of a strategy with a given probability, There are various methods to solve such type cf games, but only three tnethods will be discussed here : Method 4 (Algebraic) “Tne method for deternining the per cen (or probability) to be associated with a given stetegy wil te illustrated for the previgus example, Let us bert i ; tegy A, or A, ing to probubifities such that hig cared ai a ae ei lee RO A of suategies B, ot B,. player B selects strategy B,, the possible payoffs to player A are 65 ana 59. If player 4 selects strategy 4, with a probability of p and, therefore, selects strategy'A, with a probability of (1-1). then his expected grin for this game are given by ss | 5p + 50(1-p) ‘rategy B,, then player A's expected gains are 45p + 55(\-p) Now, in onder for player 4 1~ be indifferent to. which strategy player 2 selects, he wishes his expected gains to be equal for cach of player 2's possible moves, Thus, the two equations of expected gins are set equal and solved for p as given below : ” - 5p + 50.1 ~p) = 45p + 551 -p) or 25p=5 Therefore, e P=S=0.2;1-p=1-02=08, ‘ hee Player 4 would select Strategy A, witha probability of 0.2 and strategy A, with z probability 0f 0.8. ' Similarly, player B would determine his probabilities q and (1 — 9) for scleciing strategies B, end 3, respectively, by equating his expected losses if player A chooses strategy A, to the expected losses if player 4 chooses strategy A, as follows : 659 + 45 (1--9) = $0g 4 55(1-g) or 25¢ = 10 Therefore, 9=US-0431-g=4-04=06. : Hence, player B would select strategy B, with probatility cf 9.4 and strategy B, with a probability of 0.6. , The value of the game is deiecmined by substituting the values ofp or g in any of the expected value and is calculated as 53. Method 2 (Calculus thethod) . . ‘This method is almost similar to the previous method except that instead of equating the two Cxpouted values, the expected value for a given player is maximised, To illustrate this method, le. us take the sam: exemple discussed in the previous method. : Suppose player 4 selects strategy A, with a probability p and obviously selects A, with # probability {1 pi and player B selects strategy B, with a probability q and obvicusly selects strategy 2, with a Probabiiity (1 ~ 9). Then the expectation is given as below : Ep, 9) = 65pq + 45p (1-9) + $0 (1 ~p) q+ 55(1~p) (1-9) Mexpectation is to be maximized, then On the other nand, it player B selects s¢ hill LuStatistics ® 659 +45 (1 ~ 4) ~$0q-55(1-gh "0 ; or 25qs 10 ) Therefore, : a7 =04,1-9=1-04= 06 aE ‘and FE weap +45p +3001 -p)- =58()-g} 0 . or pos i : 5 Therefore, po xy 70sd~p71-02 708 To determing the value of the gune, substitute the values of p, !- p,q jand | = qinthe expen © of expected vaiue, The value of game is found to be 53 as before. 4 Mlusteation S. Consider a rectcighlar;-'e whore matrix: * Phyerd Find the Best srstepies a the value ofthe gre. ‘Selutlon, Since the mtr has no sacle point, it is Uesirable (cr A and Ito play with egrtein vrequencieg, suppcay i Vwith frequency 4{0 <6 5 1) and plays 2 with frequency (1 ~ ere per eee RSLs es Avth eequney (1p). Tha ds matematcs expectation inxiven by E (sy) bys del rare -a)92(Ina0 (ly) expectation is wo be reimised : “ _ g Ba yx Y) -Ay-l= = 0 ae J ed AG 2) 20 Fron(:). 2hiedys Ieee - Lory th : From (2), peter dade 2420 0 : dem Dorx ip hus here shooX! choose strategies i and 2 with opal probability and Bs i heave 2 with pobablty 24. The vale ofthe geme is found abe 57 by subs these wales of x and yn 2 (9) IMlasteesion 6, Consider a yamne whose znatrix is given a3 a: Plays + . : . I 2 toa 6 . - Pare Are de ier cad 7 . _ Find the optimal strategies foreach player a the value ofthe game, "Solution. Letxand ybe the probajlites of opting rtateles | nd 2 by player 4 an H respctivei- Then < Blay) ary eb (I=y)eev lexi ed (Lee Sa apets- -hyi-ey=d (I-90 yla-b- cried’ 6+ * Slatistical Dacision Theory, €67 yn t=) echoed 9 be ex dita : xlo=b-c ibm de ht, os ly ess (@-b=rra ‘ iting (HS A re ed) ; 6 ’ @3d)-6s0 . - Hosen. thismethod of solmion can onty be used for 2 * 2 mlrioes; for larger matsices we need to develop some othe ja procedure. od 3 (Graphicai Method} ‘ re . thod cz Ba N - ¥ e ‘The graphical metiod car ke used to solve ‘games where one of the players has only two altemalives yte other has two or more alicrnatives. Consider the following game : : Playe: @ Player A ie Assume that glaycr Z plays shategy 5, ail the ime, What will the value or such a game be to player ‘pte value will depend on whit player 4 dics, If player A plays strategy A,all the time, the vale of . ppepunt wilt be 1. [player plays strategy A. pis strategios with a prokability p ard (1 ithe time, the Value of game will be 6, and if he mixes ill be given by : Ey Tp t+ 2ii-p)=So+2 : a + The vale E,= ~Sp + 6 and E, = Sp +2 can be represented graphically ty stczignt lines as shown inthe Figure given below : . o “The hocizontal axis which zepresents ths probability that player 4 will play strategy 4, is constructed first, starting witi py = 0 on the rignt sidé up-to p = 1 on the Icft side. Every peint on the horizontal axis Rpresenis the probability mix between stratégy A, with prodability 0.6 and choosing suategy 4, widi 7 Probability Q.4, . .669 Businges Staustics ‘The vertical 2ais represents the payoft to ployer A. Now, two salt tne ae ‘ corresponding t0 one of player B's alternatives in the following way. For the payer’ playen B plavidy strategy 2 ll che time, a straight line is drawn fiom 7 onthe lo pi rs side, This is the linc “6(1- p) = -Sp+ 6. Next, x straight line is drawn forthe stg is pinyer B pinys strategy 2, all the time; front fon the left to 6 on the right, Aescriin ion Ate + Jp 2 p)= Sp + 2 The shaded area represents the enire feasible area of expecieg & % lng A) varies between fund I, Player A will try to lock for a payofT on the uppe! boundary orto mig Player B wil ty to establish the payaat the lower boundary of the feasible area, ay prt agp what player B soes, the payoff to player 4 is the inaximum. However, iis alra equal nee ngs tt isthe lowest on ths upper boundary ind th highest onthe lower je in babitity p can be read aif the horizontal exis as 0.4, i.c., player ad "ay 40% of the'time, nnd therefore, strategy’ A, 60% of thé time. The value of the game jg BY Say and can be read off from: the vertica! axisas¥= 4, / ney Ina similar mare, iti possibie to present player B's siteation on an eddtiony g reveal that player B's strategy is to mix strategy B,, 50% of the time and strategy’ By Sowden ia Dominance Principle : , hig Wher any'strategy s bette. than anther forall cases it is said to be duminating the clear tat we can discard the later one frm vor consieration. Dominated rows arcane to reduce tne size of the matrix, For example, : seat Player B pon. 3 7 > 2 : i Player A wT . : 1 6 "Here. ttis clea that cack: of 4's payotts for strategy 3 s less than that of strategy 2. Thus, eh inferiorand clearly sttegy 2 is « dominating strategy. taopears that we mightas Wel solve eee < Player sd Piayer A! ! 7 2 . 216 2 7 Also, if we observe, we find B's losses (4's payoffs) are elways-more for strategy 3 thn fy strategy !, so 2 night as well never play strategy 3. Thus, our game teduces to Player B : i PlayerA 1] 1 216 end thus the solution to our original game is the same us the solution to this gzme (so. we need oalyto solve for a2 * 2 inatrix), 2 Rule of dominance . Be “ (a) [fall elerzents in 2 column are greater than or qual to the corresponding elements in eno column. thea that colunin is dominated, 5 : {6) Suaifarly, if all elements in s row are less than or equal to the corresponding elemetsit another row, then that row is dominated, . sie nD